2nd Quarter 2007 Conference Call
Mr. Hogan – We would like to welcome everyone to our second quarter conference call. Joining me on the call here are David Parker, CEO and Chairman of the Board, as well as various members of senior management.
This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in filings with the Securities Exchange Commission.
As a reminder to everyone on the call a copy of our prepared comments and additional financial information is available on our website. Due to the depth of discussion in our press release, our prepared comments will be brief and then we will open up the call for questions.
In summary, I want to reiterate David’s comments in the release, that although there were unusual and infrequent items in the quarter, we view our results as disappointing. I am extremely proud and encouraged that our employees, both driving and non driving, desire to improve our results, staying focused on making quality, sustainable long term decisions and also continuing to provide great service to our customers. Besides the infrequent items discussed in detail in our press release, the combination of declining truck tonnage and a very competitive freight environment significantly slowed progress across all asset based companies. The customer bid process accelerated to a fever pitch during the quarter with bids up 182% for the Covenant Transport subsidiary versus the second quarter a year ago. Simply put, the results of the bids and soft economy put pressure on our freight rates, decreased our fuel surcharge recovery due to customers raising their fuel surcharge bases, and increased our non revenue miles as we “scrambled” to haul the most profitable freight.
We would characterize freight flows during the quarter as slightly improving but obviously not at the pace that we historically see. April was an “ok” month freight wise; May started out soft, improved toward the second half of the month and basically held at that level throughout June. We did not see a strong close of freight to the quarter. We did see some weeks of increased activity during the quarter where capacity tightened up quickly but those weeks were not obviously sustained. From an operating standpoint, average miles per tractor declined 1.3% versus the second quarter of 2006 and our rates were up 2.1%, while our deadhead or non revenue miles increased from 9.6% in the second quarter of 2006 to 11.1% this year. The combination of these factors produced a .9% decrease in average freight revenue per tractor per week.
Additionally, we discussed during the first quarter the impact of the soft freight market in the Southeast on our Star subsidiary and the transition of the former Covenant refrigerated trucks to our SRT subsidiary. Both these events required broker freight to keep the trucks moving and we saw our loads hauled through brokers jump to about 13% of total loads during the first quarter. We have made progress in the network in that we have been able to reduce loads hauled through brokers to 10% of total loads during the second quarter, with ground being picked up significantly towards the end of the second quarter. The overall effect on our operations hauling broker freight is negative, because fuel surcharge is not recovered and broker rates tend to be lower than other rates, excluding the portion that would be equivalent to fuel surcharge. The positive is if the freight is in desired lanes, the load puts miles on the trucks allowing you a better opportunity to keep a driver motivated. We fully expect to have this number reduced to below 8% of total loads during the third quarter, with a longer term goal of being under 5% on a consistent basis.
From a cost standpoint, excluding the one time items, our pre-tax costs increased about $.12 per mile over the second quarter of 2006. Three items comprised the majority of the variance; fuel net of surcharge increased $.039 per mile, capital costs (leased revenue equipment plus depreciation and interest) increased $.034 per mile, and purchased transportation expense associated with our new Solutions subsidiary added $.027 per mile of expense. The issues around these three items were discussed in our release. For the foreseeable future, we expect our fuel costs, net of surcharge to remain in the $.23 to $.24 per mile range reflecting the new surcharge base programs of our customers. As stated in the release, our capital costs did reduce sequentially from the first quarter and we do feel those costs will continue to decline throughout this year. Our fixed costs in total did decline versus the first quarter by about $.02 per mile, largely attributable to the reduction in capital costs.
From a balance sheet perspective, we have been able to reduce our total indebtedness, including off balance sheet obligations, by $28 million since yearend 2006. During the quarter our assets held for sale was reduced from $26.5 million to $17 million as of June 30, 2007 and should be lower than $10 million by yearend 2007. As of June 30, 2007, the Company had approximately $26 million of available borrowing capacity under our credit facility. The credit facility contains certain restrictions and covenants relating to, among other things, tangible net worth and cash flow coverage. We are working with our bank group to amend our current credit facility to reflect our second quarter performance and allow compliance with all covenants as of June 30, 2007. We will have these modifications completed by the time we file our second quarter 10Q.
David will now give you an update on the business and our outlook for 2007.
Thanks Joey
First, I would like to read for everyone on the call the statement that I made in our earnings release. “I want to express my sincere regret and disappointment with our financial results for the second quarter of 2007. Although a majority of the loss is attributable to three items we believe to be infrequent, and we knew our ongoing business realignment would involve fluctuations in results, the results are nonetheless unacceptable. There were a few operational improvements during the quarter, particularly in the asset productivity of the regional service offering, but these improvements were overshadowed by the overall numbers. We are committed to a full evaluation of the Company’s strategy and are leaving no stone unturned in our effort to improve the Company’s results. Fortunately, we have a strong balance sheet, many fine customers, a loyal employee base, and stable relationships with our lenders that provide a solid foundation for the Company as we continue the turnaround process.”
Second, as an example of us continuing to examine our strategy to improve results, we have decided for our Covenant Transport subsidiary to unite the sales force under common management. We felt when the restructuring was announced two years ago that focusing the efforts divisionally was the prudent path to allow ownership and specialty of products. Today we now feel a focused, consistent message for our sales associates and customers is the most critical need. The sales force will be empowered and held accountable to sell all products of all divisions. In that regard, we made the decision to reassign Jeff Paulsen and Jeff Taylor, both with prior successful sales backgrounds, to help run the day to day operations of the united sales force. Their 100% focus will be sales. The General Manager’s of the divisions within the Covenant Transport subsidiary will be much more focused operationally to make sure the best service for our customers and drivers are achieved.
Third, from a financial and operating perspective we had four goals internally that we considered stepping stones of progress that we wanted to accomplish in the first half of 2007:
1) Grow our revenue per truck by 3% over the first half of 2006 – We were basically flat at a .4% increase. We underestimated the vigor of the competitive environment which Joey discussed earlier the number of customer bids we saw during the first half.
2) Grow our new Solutions subsidiary to an $8 million run rate by the end of the second quarter – We exceeded that goal and are currently at an $18 million run rate.
3) Hold our variable costs, net of fuel surcharge; to $.91 to $.92 per mile – Excluding the two large insurance claims in the quarter, we operated the second quarter at slightly under $.96 per mile. Fuel, net of surcharge, was $.04 higher than we expected in the second quarter. We discussed in the release the major reasons for the variance related to fuel.
4) Lower our fixed costs to about $51 million by the second quarter – Excluding the plane impairment charge, we accomplished this goal. After the Star acquisition in September of 2006, our fixed costs increased to $55 million in the fourth quarter of 2006, and we knew long term that area had to come down. We expect this area to continue to decline throughout this year.
The results of the lackluster revenue per truck movement, combined with the net fuel cost increase, the operating leverage kicked in backing up our operating results.
Third, what are our goals for the second half of 2007? Our near‑term goal is to break even for the second half of 2007, possibly posting a loss in the third quarter, followed by a small profit in the fourth quarter. We believe this is achievable with help from the economy, customers, vendors and favorable results from the disposition of our assets held for sale. However, it is by no means certain that we can achieve this goal, and we caution our stockholders, employees, and customers that we are anticipating slow and modest improvements given the current freight environment.
We will now open up the call for any questions that you may have. |
Printer Friendly
